Tuesday, October 7, 2014

Three updates on jobs, hours, and wages

- by New Deal democrat
I wanted to update three series with the jobs data through September:

1. The REAL real unemployment and underemployment rate;

2. A better measure of labor utilization; and

3. Real wages per capita

1. The REAL real unemployment and underemployment rate.

Although I haven't seen them in a few months (did I manage to kill them?), there used to be a number of analyses that claimed to calculate "the real unemployment rate" by either pretending there was no onslaught of Boomer retirements, or were relying on decade-old Fed estimates. The idea was that there was some dark pool of "missing workers" who were so discouraged they didn't show up in the monthly report. This was nonsense, since every single month, the Household Survey includes a measure of those who have given up looking, and so aren't considered part of the labor force, but who still want a job now: series NILFWJN. If we add that to U-3, we get the "real" unemployment rate, and if we add it to U-6 (which includes, among other things, involuntary part time workers), we get the "real" underemployment rate.

The first important note about NILFWJN is that it stopped declining, and in fact has been increasing this year:

It is not a coincidence that this trend reversal happened exactly when the Congress cut off extended unemployment benefits at the end of last year. About half a million people gave up, and simply stopped looking.

As a result, while the U-3 unemployment rate has declined by -0.8% so far this year (blue), the NILFWJN adjusted unemployment rate has only declined by -0.6% (red):

With that intro, here is the updated REAL unemployment rate (red) compared with U-3:

This currently stands at 9.6%. Remember to compare apples with apples - this is very similar to where it was at the end of 1994, which was a neither great nor awful jobs environment.

Now, here is the REAL underemployment rate, adding NILFWJN to U-6:

This is currently 15.7%. Again, very similar to the end of 1994. It sounds awful, but note that at the peak of the best jobs boom we've had in the last 40 years, in the late 1990's, U-6 plus NILFWJN never got significantly below 10%.

2. A better measure of labor utilization

Paul Krugman has used the employment to population ratio for the core employment ages of 25-54 as a proxy for slack in the labor market. This metric avoids conflation by Boomer retirements, and at about 100 million people, is about 2/3's of the entire labor force. Here's what it looks like now (for some reason the St. Louis FRED doesn't keep this data, so the graph is from the BLS website):

This is up about 2% from its post-recession bottom, but still off 3.5% from its pre-recession peak.

I think there is a better measure. Instead of looking at the number of jobs in the economy, we look at the number of hours of work in the economy (thus taking care of the part-time worker issue), and divide that by the number of people in the labor force, plus our old friend NILFWJN. Here's what we get:

We are currently at 94.9% of the number of hours available compared with the peak during the jobs boom of 1999, for those who are either employed or want a job. This metric has been improving at the rate of about 2% a year. If that pace continues, we should surpass the 2007 peak in about 9 months, and at least approach the 1999 peak in about 18 months.

3. Real wages per capita

There is a lot of information about hourly wages. But what is the average in total wages being made by American workers? The number of hours worked by the average worker changes significantly over the economic cycle.

To see how much the average American worker is making, we start with aggregate amount of wages paid (available in the monthly Household Survey), and divide that by population, and then take into account inflation. This tells us the amount of real wages available to support each person in the population. Here's the graph, first of the long-term over the last 60 years:

This very clearly shows how great the 1960's and late 1990's were for wage growth, and the stagnation and even decline from 1974-1995, and again after 2000.

Now, here is a closer view from 1995 to the present:

This gives us qualified good news. While hourly wages are still stagnant (bad), the average American is working more hours (good or bad, depending), and thus at the end of the pay period, nearly as much buying power is available for each person as at the 1999 and 2007 peaks (good). If the present trend continues, per capita real wages should set a new record at some point in the next 3-12 months.

SUMMARY: We should exceed the 2007 peak in hours and real wages per capita witin the next year. If current trends continue, full employment is probably still about 24-36 months away.